Analysis & Opinion

LISBON (Reuters) - Portugal's Prime Minister Pedro Passos Coelho promised on Friday to listen to the nation, suggesting he could soften planned tax hikes which have sparked the worst backlash to austerity since the country received a bailout last year.

But protests reignited in Lisbon as President Anibal Cavaco Silva met with his council of state. The consultative body made up of senior political figures will discuss the situation in the country after the measure to hike the social security levy for workers to 18 percent from 11 percent was announced on September 7.

The plan to raise the contributions in 2013 has undermined a reluctant acceptance of austerity in Portugal and sparked large protests, increasing pressure on the government as it strives to meet the strict conditions of the bailout.

"We are not deaf to the difficulties faced by the country," Passos Coelho told parliament.

But several thousand protesters booed the council members and Finance Minister Vitor Gaspar arriving at the presidential palace in Belem. They chanted: "Thieves, thieves!" and carried banners "Enough of robbing the people!" or "We fire you!"

"They're a rotten gang. They have powerful computers to make great projections, but know nothing about real life," one of the protesters told SIC television.

POLITICAL CRISIS OVERCOME?

The tax measure had strained relations between Passos Coelho's Social Democrats and the rightist CDS party -- the small coalition partner that ensures the government's majority in parliament and is traditionally opposed to tax hikes.

But late on Thursday, the two parties said they remained committed to the coalition pact and the targets of the bailout, while calling the protests a message to be heeded.

Cavaco Silva said earlier on Friday the likelihood of a political crisis had been averted.

"I think this possibility has been overcome," Cavaco Silva said in televised remarks. "That would be dramatic for Portugal, everybody knows what could happen to Portugal if we add a political crisis to our difficulties of external financing."

Portugal has entered its worst recession since the 1970s as it labors under sweeping tax rises and spending cuts, with the centre-right government's popularity slumping to an all-time low after it announced the tax changes.

In the first parliamentary debate since the summer break, Passos Coelho refused to say whether he would actually reverse the measures, saying only that he is committed to talking to unions and businesses. On Monday he will meet with them for more talks on the measure, which has broken a previous political consensus in Portugal behind the bailout.

"We know that we are resolving problems, but we have the humility to recognize that the difficulties faced by people are very big and we know that Portugal's adjustment is not over at the end of the year," Passos Coelho said.

Opposition Socialist leader Antonio Jose Seguro told parliament the government had been "incompetent with the budget" in reaching a point where more austerity measures are necessary. The government had previously hoped the adjustment would have borne fruit by now, but the recession will now extend into 2013.

"Now you promise more austerity for more time," said Seguro.

Armenio Carlos, head of the country's largest union CGTP told reporters after meeting Passos Coelho earlier on Friday the premier had not given any alternatives to the tax hike.

"We will not accept one cent of salary cuts," Carlos warned.

The head of Portugal's third largest private bank, Banco BPI, said on Friday rising political tension could hinder the country's planned return to debt markets next year.

"The greatest risk on the horizon is Portugal's political situation," BPI chief executive Fernando Ulrich told Reuters. "This is my gravest concern, to see if the political and social situation worsens or eases."

Still, Portuguese benchmark 10-year bond yields remained practically flat on Friday at around 8.7 percent after having fallen sharply earlier in September on the European Central Bank's plan to buy bonds of struggling euro zone issuers.